MARKET MADNESS

September 2, 2011

These last few weeks have been a textbook lesson on the problems of market timing.

Think about it. If four weeks ago the American stock markets had fallen forty or fifty percent or more, nearly everybody would have said, “I knew it was going to happen.” The people who took portfolios to cash would be coming out of the woodwork, saying, “I predicted it and sold my clients’ portfolios.”

But instead, the markets have moved essentially sideways, and with huge, historic volatility. Why? Because stocks are currently considered to be undervalued, a rare buying opportunity. Each time the stock market falls three, four or five percent, buyers rush in to pick up bargains at a discount. This makes the stock markets rise in value, then the pessimists leap in, the bargain hunters take the profits they’ve made and this causes the markets to tumble until stocks are a bargain again and the markets rise once more. This did not happen in 2008 because then stocks were considered to be overvalued, with few bargains to be found.

Those who sold everything a few weeks ago and took most of their investments to cash are either hiding or buying or both.

And, so, what’s it to be now? A recovery (which is the most common prediction right now) or a market crash and a “double-dip” recession? Do we “know” what is to happen now? Do we “know” that the markets are about to crash? On the before the day of this writing the market was down substantially. Today it is “up sharply.”

Historically, a sideways, choppy market like the one we have been in for a few months has eventually broken out steeply either up or down.

The Republicans are willing, even eager, to drive our economy over a cliff to further enrich the most wealthy and to discredit Obama and the Democrats. The Democrats are inclined to let the Republicans do this so as to discredit them in 2012. And these people work for us!! Mitch McConnell, the Republican leader in the Senate, has stated that his primary goal is to unseat President Obama in 2012. His oath of office is to the Constitution and to the people of the U.S., (not Grover Norquist) but serving our well being is not his primary goal. This may not be illegal, but it is moral and ethical treason.

We are used to planning and managing money in an environment driven by economic reality (which is uncertain and volatile enough!). But, when the politicians decide to cause downturns for political reasons divorced from business cycles, then planning becomes much more precarious. Another way to put this is that it is not the downturns that worry me. You should all be allocated to take such downturns into account. But what if, after the downturns, there is no net growth? That’s where our politicians and bankers have been taking us for the last eleven years. In this environment the process of trying to use historical norms to manage your money and help you get to your goals, becomes much more difficult. It requires that we be, at least in the short term, much more nimble and creative.

Fortunately, First Affirmative has been in the forefront of developing new tools for us to work with, but in order to navigate the twists and turns for you I am going to need even more of your participation than in the past.

For those of you whose money is being managed under our auspices, let’s get together soon to discuss what choices/changes would be most appropriate. If you and I have met a short while ago, let’s at least have a phone meeting right away.

For all of you reading this, we should probably get together to discuss how your financial plans may need to be re-evaluated. The assumptions of the past may very well not apply any more. For the next few years it may be tricky to invest in the traditional ways and still get anything like historical returns. How will this affect your financial planning? Let’s talk about it.